- 1 IRS Tax Treatment of Foreign Dividends for U.S. Persons
- 2 Are Foreign Dividends Taxable in the U.S?
- 3 Foreign Dividend Income
- 4 Non-Taxable in Foreign Country
- 5 Can I use the Foreign Earned Income Exclusion?
- 6 I Never Received a 1099 or Equivalent?
- 7 Is the Foreign Dividend a Qualified Dividend?
- 8 How Will I Get Caught?
- 9 Out of IRS International Tax Compliance?
- 10 What Can You Do?
- 11 Golding & Golding: About Our International Tax Law Firm
IRS Tax Treatment of Foreign Dividends for U.S. Persons
Foreign Dividends & U.S. Income Tax: In general, the United States taxes U.S. persons on their worldwide income — and the United States has very complex tax rules involving the IRS treatment of foreign income. Unlike many foreign countries in which dividend income is either tax-free or tax-exempt — the United States taxes foreign income, although the tax rate may be reduced if it meets certain requirements (Qualified Dividends or Long-Term Capital Gain). The international tax rules are compounded significantly when it involves foreign investment income, such as dividends — especially because the PFIC (Passive Foreign Investment Company) rules may kick in. And, when a person does not include this income on the tax return, they have unreported income, which can lead to other issues as well. And, with the IRS taking an aggressive position on matters involving foreign accounts compliance, it is important to try and stay compliant.
Are Foreign Dividends Taxable in the U.S?
Excluding issues involving US tax on non-U.S. persons with U.S. investments, the answer is, yes. Foreign Dividend income is usually included on a U.S Tax Return in two different places: Schedule B, and FATCA Form 8938 (presuming the reporting threshold requirements have been met for Form 8938)
Foreign Dividend Income
How can the U.S. Government tax foreign dividend income? It is because the United States is a Citizen-Based Taxation (CBT) model, which means the United States taxes U.S. Persons (U.S. Citizens, Legal Permanent Residents, and Foreign Nationals to meet the Substantial Presence Test) on their worldwide income.
Here are some of the more common issues we handle on the topic of Foreign Dividend and U.S. Taxes:
Non-Taxable in Foreign Country
Not all countries tax dividend income, or if they do, it is taxed at a very reduced tax rate — and only in certain situations. For example, there are some countries such as Singapore or Hong Kong, where dividend income is typically tax-free.
Unfortunately, from the IRS’ perspective, the IRS does not care if the money is non-taxable dividend income in a foreign country. For example, even though the dividend income you earn in Hong Kong is not taxable in Hong Kong, it must be included on your US tax returns.
If you earn foreign dividend income in a country in which you pay U.S. Tax, you are entitled to a Foreign Tax Credit. Otherwise, the income is combined with your other worldwide income — to determine your progressive tax rate on your US tax return.
Can I use the Foreign Earned Income Exclusion?
Generally, you are not able to use the earned income exclusion because dividend income is passive income, and the earned income exclusion which qualifies for the exclusion is earned from Employment, Personal Services, etc.
I Never Received a 1099 or Equivalent?
If the foreign country’s Institution did not provide you with any paperwork regarding the dividend income that was earned, you are still required to include the information on your tax return. You may consider contacting the bank or other investment fund/foreign financial institution to obtain a summary of the earnings.
The mere fact that you did not receive a 1099 or equivalent will not exempt you from including it the information on your US taxes.
Is the Foreign Dividend a Qualified Dividend?
Not all foreign dividends are qualified. In order for a foreign dividend be qualified, it has to meet certain threshold requirements to assess whether it meets the minimum basic requirements for qualified dividend status.
Generally, the foreign dividend must meet any of the following requirements (brief summary):
– The Corporation is incorporated in a U.S. Possession
– The Corporation is eligible for benefits by way of a U.S. Income Tax Treaty
– If the stock is readily tradable on an established securities market in the U.S. (or a National Securities Exchange registered under Section Six of the Securities Exchange Act of 1934 or NASDAQ Stock Market.)
How Will I Get Caught?
With the introduction of FATCA (Foreign Account Tax Compliance Act), more than 110 Foreign Countries and 300,000+ Foreign Financial Institutions are proactively reporting account holder information (including balances and income) to the IRS.
Therefore, the chance of the IRS finding you has increased exponentially. In addition, the IRS has launched several new Tax Enforcement Groups, with an increased focus on International Tax compliance.
Out of IRS International Tax Compliance?
If you are already out of compliance for not properly reporting your foreign dividend income on prior-year returns, there may be some other issues to contend with as well.
For example, did you properly file an FBAR or FATCA Form 8938? If you received a gift from a foreign person that exceeds $100,000 (or a gift from a foreign business or foreign trust distribution) did you file the requisite form 3520? Moreover, if you also have ownership or interest in a foreign business (Form 5741) or a partnership (Form 8865), or Passive Foreign Investment Company (Form 8621) you may have a further filing requirement.
What Can You Do?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.